Employees and Independent Contractors Municipal Attorneys Conference August 4, 2007 Diane M. Juffras Institute of Government

The Independent Contractor  Not entitled to benefits  Not subject to FLSA, FMLA  No withholding of taxes  Not covered by workers’ comp  Not eligible for LGERS, health insurance

The Bottom Line: FLSA Penalties  Back wages (2/3 yrs)  Liquidated damages  Injunction  Civil Penalty of $1,100 per violation

The Bottom Line: IRS Penalties  Employer liability for 1.5% - 3% - 100% of employee’s federal income tax liability  Employer liability for employer FICA contribution and 20% - 40% - 100% of employee’s FICA contribution  Interest on underwithheld amounts  Additional penalties

Employee Independent Contractor  Employer gives assignments  Employer may require particular methods  Employee may be disciplined or terminated  Employer concerned only with results  Employer does not specify means, methods, manner of getting the work done  Employer does not supervise  Employer does not criticize, discipline or terminate

Six-Factor FLSA “Economic Reality” Test:  Degree of control employer has over worker  Worker’s opportunity for profit or loss  Worker’s investment in equipment and/or materials needed for the job  Whether the work requires a special skill  Permanency/duration of relationship  Extent to which services rendered are integral part of employer’s operations.

 Degree of Behavioral Control  Degree of Financial Control  Nature of the Relationship  No one factor is dispositive Every situation different IRS factors include FLSA factors IRS Divides Factors into 3 Categories:

MYTHS: The employer is not liable if: the worker signed a contract. the worker wants to be an independent contractor. the worker has another job. the worker works on a part-time, when needed or occasional basis.

Problem Areas  Temporary and part-time employees  Employees who do not need benefits  Tight budgets  Volunteers  Instructors  Professionals  Mayors and council members

Revenue Ruling : Physicians  High level of specialized training means little day-to-day supervision  How is physician paid? Percentage basis Salary basis Percentage basis with guaranteed minimum  Can s/he employ or engage substitutes when absent? Who pays the subs?  Can physician engage in private practice or perform services for others?

Public Officials  Not defined by the IRC  Not subject to self-employment tax Therefore assumed to be earning wages  “A public official has authority to exercise the power of government.”  “Any official who administers or enforces public laws, whether the individual is elected by the public or appointed to an office.”

The following facts indicate that an office is a “public office”:  The office was created by the constitution or through legislation, or by a municipality or other body with authority conferred by the legislature.  The office was delegated a portion of the powers of a government body.  The powers conferred and the duties to be discharged are defined either directly or indirectly by law or through legislative authority.  The duties are to be performed independently and without control of a superior power other than the law.  The office has some permanency and continuity, and the officer takes an official oath.

Metcalf & Eddy v. Mitchell, 269 U.S. 514, 520 (1926) “ An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its terms, its duties and its compensation.... The term ‘officer’ is one inseparably connected with an office; but there was no office of sewage or water supply expert or sanitary engineer, to which either of the plaintiffs was appointed. The contracts with them, although entered into by authority of law and prescribing their duties, could not operate to create an office or give to plaintiffs the status of officers.... There were lacking in each instance the essential elements of a public station, permanent in character, created by law, whose incidents and duties were prescribed by law.”

As an example, take City Attorneys in State A – p. 4-8

G.S. 160A-173 City attorney; appointment and duties. The council shall appoint a city attorney to serve at its pleasure and to be its legal adviser.

Fleming Bell, “The Attorney and The Clerk” in County and Municipal Government in North Carolina The retainer usually covers such services as the following:  Attending all meetings of the city council...  Being available for routine consultation with board members and department heads;  Drafting ordinances and resolutions;  Preparing routine legal documents like deeds and simple contracts;  Preparing legal advertisements.